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Australia’s target to build 1.2 million homes by 2029 faces a structural dead end. A landmark AHURI report, led by Dr. Andrea Sharam and involving 19 researchers from seven universities, show that our housing supply issue is fundamentally a construction productivity crisis, not a planning one.
Australia has a housing supply crisis. But the Australian government target to build 1.2 million new homes by 2029 will not and cannot be met. This crisis is a housing construction crisis not a planning crisis.
In this article, the first in our series on our research into how we can build more houses faster and cheaper while responding to social and environmental needs, we explain why detached housebuilding cannot sustain a lift in production.
Current solutions fail to tackle the root cause of inefficiencies in housing construction. Current solutions, such as planning liberalisation for instance risk creating other long-lasting problems while having no impact on housing output. Other measures will largely be ineffective.
What do we know about housebuilding?
- The industry is dominated by the large number of SMEs (Small and medium enterprises)
- Margins are very low, cashflow vulnerability high. Insolvencies are high and more likely during booms than in busts
- Good builders face competition from marginal operators who often ignore building code requirement
- There is a very significant defect problem
- Because the production process is so inefficient the workforce is under-utilised, even in boom times. Just think about the hours tradies spend on the road rather than on site.
- During busts there is extensive under and unemployment which sees a proportion of the labour force permanently exit the industry. This hole in the bottom of the workforce bucket undermines attempts to increase the size of the labour pool.
- The skills shortage is exacerbated by increasing specialisation, while specialisation increases the scheduling challenges (see below).
- Each house is built by a temporary team of subcontractors, militating against training and innovation while encouraging defects.
- Housebuilding is largely a contract market in which high levels of customisation undermine efficiency and encourage defects.
- Labour is subcontracted and equipment hired negating the need for capitalisation. Lack of need for capitalisation forestalls investment in plant and processes that could increase productivity.
Why can’t detached housebuilding lift production?
Housing construction is largely a linear process in which tasks are sequenced. Task delay often creates a queue for subsequent tasks. While the delay to the initial task may be short, the subsequent delays it triggers are often much longer. For example, the scaffolding supplier suddenly says they can only get to the site a week later than planned. This means the window installers need to be rescheduled, but being booked elsewhere can only come back in five weeks’ time.
In a system reliant on extensive subcontracting such delays are inevitable. In boom times delays are exacerbated due to increased competition for construction resources. This alteration of production in response to changes in demand – is known as “sales” or “due-date” based production – and is inherently inefficient.
Scheduling challenges and queueing problems explain increased project duration (which of course contributes to increased costs). But it does not explain the inability of the industry to deliver a sustained lift in output.
The failure of the detached housebuilding industry to lift output is explained by builders taking on work that they cannot realistically deliver during booms. This creates a backlog. Backlogs are not fully cleared during subsequent downturns, and hence builders are already constrained at the beginning of the next up cycle. But why does this happen?
Because work dries up in busts builders are inclined to make the most of booms. Accordingly, many builders take on more jobs in booms than they can realistically deliver in the statutory 12 months required by domestic building contracts (hence the increased under construction rate rate).
Builders’ margins are low and builders are prone to cashflow constraints. Banks are very reluctant to provide cashflow support because of the threat of insolvency. This also encourages builders to take on new work so that client deposits can be used to pay suppliers for other work. That is, they take customers’ deposits without commencing construction to shore up their cashflow position.
This creates a backlog of work. While the inevitable subsequent downturn provides an opportunity to catch up, backlogs are often not fully cleared before the next boom emerges. This explains why detached housing commencements have been flat for 45 years despite population doubling.
Further, the rollercoaster of booms and bust means builders alternate between having no time or capacity to change, train or innovate in booms and inadequate resources to invest in productivity during busts.
In the next article in this series, we turn to apartments, where a different dynamic is evident.
The authors would like to knowledge this research was funded by the Australian Housing and Urban Research Institute.
